The plaintiff in this case is a law firm that is defending two
former officials of the Town of Delaware, New York (the "Town"),
in other litigation before this Court relating to a land use
controversy. Plaintiff, as assignee of the Town's claim against
its carrier, sues for certain of the costs of defense. The
fundamental issue is whether pretrial rulings in the land use
case resulted in the termination of the carrier's duty to defend.
Assuming that it did not, the carrier disputes the reasonableness
of plaintiff's charges. This is the Court's decision after trial.

Facts

The controversy concerning the alleged termination of the
carrier's duty to defend depends upon the complex and
interrelated histories of both the land use litigation in this
Court and the coverage litigation in the state courts that
preceded this action.

The Early Stages of the DeFalco Action

In September 1990, Joseph DeFalco and others sued William Dirie
and V. Edward Curtis, both former Town officials, and other
defendants in consequence of a land use dispute in the Town
("DeFalco").*fn1 The case initially was assigned to Judge
Goettel.

The DeFalco complaint alleged three causes of action against
Dirie and Curtis. The first alleged extortion in violation of the
Racketeer Influenced and Corrupt Organizations Act ("RICO").*fn2
The second claimed deprivation of plaintiffs' civil rights in
violation of 42 U.S.C. § 1983. The sixth sought review of certain
administrative action by the Town, relief typically available in
the state courts under Article 78 of the Civil Practice Law and
Rules.

The DeFalco defendants moved to dismiss the complaint. Those
motions resulted in a decision on April 24, 1991, in which,
insofar as is relevant here, Judge Goettel dismissed the Section
1983 claim in its entirety with leave to replead. This prompted
the DeFalco plaintiffs to file an amended complaint in May 1991
which, with modifications not relevant here, asserted the same
claims as the original complaint against Dirie and Curtis.
Certain defendants moved to dismiss the amended complaint as
well, but the motions had not yet been decided by the time the
coverage litigation that gave rise to this action was commenced.
Thus, when the coverage litigation began, Dirie and Curtis were
defendants in DeFalco on three claims for relief, one under
RICO, one under Section 1983, and the third in substance a state
court-style Article 78 proceeding.

On March 31, 1992, while the Coverage Case was in its early
stages, Judge Goettel ruled on the motions to dismiss the amended
complaint in DeFalco. Insofar as is relevant here, he dismissed
the Section 1983 and Article 78-type claims in their entirety
against all defendants.*fn4 This left only the RICO claim
pending against Dirie and Curtis. But just days later, the
DeFalco plaintiffs, pursuant to leave, filed a second amended
complaint. Insofar as it was brought against Dirie and Curtis, it
alleged three causes of action: Count I was brought under RICO,
Count II under Section 1983, and Count IV under CPLR Article 78.
Thus, it purported to revive the Section 1983 and Article 78
claims previously dismissed by Judge Goettel.

In March 1993, Dirie and Curtis moved for partial summary
judgment in the Coverage Case. Nutmeg cross-moved for summary
judgment dismissing the complaint. On May 17, 1993, the Supreme
Court, Sullivan County, granted Nutmeg's cross-motion and denied
the motion of Dirie and Curtis, who promptly appealed to the
Appellate Division, Third Department.

Following the Third Department's decision in the Coverage Case,
DeFalco was reassigned to Judge Parker of this Court. Some
months later, Dirie and Curtis, among others, moved to dismiss,
or for summary judgment dismissing, the second amended complaint.

Judge Parker ruled on the pending motions on March 13, 1996. He
noted that Judge Goettel, insofar as is relevant here, previously
had dismissed the Section 1983 and Article 78 claims in the
amended complaint and went on to conclude that "nothing in the
second amended complaint changes Judge Goettel's original
rulings."*fn9 The final decretal paragraph of the decision
stated that defendants' motions were denied except that their
"motion to dismiss Plaintiffs' claim pursuant to 42 U.S.C. § 1983
is granted."*fn10 The text of the decision, however, makes clear
that the Article 78 claim was dismissed as well.*fn11 In
consequence, Judge Parker's decision left RICO as the only theory
of liability against Dirie and Curtis.

DeFalco was tried in December 1996 and resulted in a
substantial jury verdict under RICO against Dirie, Curtis and
other defendants. In a decision dated September 26, 1997,
however, Judge Parker granted the defendants' motions for a new
trial and vacated the judgment. The case was retried recently and
again resulted in a sizable plaintiffs' verdict. Post-verdict
motions are imminent.

Later Developments in the Coverage Case

Following the Third Department's decision holding Nutmeg
responsible for the reasonable costs of the defense of Dirie and
Curtis in DeFalco, the New York Supreme Court, Sullivan County,
referred the claim of Dirie and Curtis for attorney's fees
previously incurred in DeFalco to a Judicial Hearing Officer.
Following a five day trial, the JHO, former State Supreme Court
Justice Robert C. Williams, on July 15, 1997, ruled on the claim
of Dirie and Curtis for defense costs for the period from the
inception of the DeFalco case through November 30, 1995. The
JHO found that some of the work for which counsel to Dirie and
Curtis, plaintiff in this case, sought compensation in fact was
done in the interests of parties other than Dirie and Curtis. He
therefore discounted the hours billed by the plaintiff law firm
by one-third. He further found that the reasonable value of the
services rendered was $230 per hour for Mr. Harrington —
considerably less than the $300 per hour sought for Mr.
Harrington, $140 per hour for his associate, and $60 per hour for
his paralegal.*fn12 Judgment was entered on this
award.*fn13

The Current Litigation

Counsel for Dirie and Curtis, not surprisingly, appears to have
sensed the way the wind was blowing before the JHO even before
the decision was rendered on July 15, 1997. As the JHO's decision
left open the issue of compensation for the defense of the
DeFalco action for the period on and after December 1, 1995, he
decided to seek another forum. In consequence, in June 1997, he
commenced this action seeking to recover his fees and expenses
incurred in the defense of Dirie and Curtis for the period
December 1, 1995 to the date of the complaint on theories of
breach of contract, quantum meruit, and account stated.*fn14

There has been a fair amount of pretrial skirmishing and motion
practice in this case, the details of most of which is not
material here. Two points, however, do warrant mention.

First, Nutmeg sought partial summary judgment determining that
plaintiff is collaterally estopped to challenge the hourly rates
fixed by the JHO in the Coverage Case. In an unreported decision
dated August 7, 1998, this Court ruled that plaintiff is
collaterally estopped to dispute that the rates found by the JHO
were the reasonable rates for the period 1990 through December 1,
1995 but noted that the issue here — the reasonable rates for the
period December 1, 1995 forward — is not precisely the same
because of the difference in the time periods. The Court
therefore denied Nutmeg's motion. As the rates for the
immediately preceding period are evidence of the reasonableness
of the rates for the subsequent period, however, the Court held
also that the JHO's ruling was conclusive except to the extent
that plaintiff establishes material differences between the
factors informing the assessment of reasonableness in the period
at issue here compared with the slightly earlier period at issue
before the JHO.*fn15

Second, Nutmeg sought partial summary judgment dismissing
plaintiff's claim insofar as it seeks recovery for the period
after March 13, 1996, the date of Judge Parker's decision, on the
theory that that decision left only an uninsured RICO claim in
the case, a claim which Nutmeg contends
it had no obligation to defend. The Court denied the
application.*fn16

Discussion

Nutmeg's Obligation to Defend DeFalco

Nutmeg contends that Judge Parker's March 13, 1996 decision
dismissing the Section 1983 and Article 78 claims in the second
amended complaint left only the RICO claim against Dirie and
Curtis, that it had no obligation to defend the RICO claim, and
that it therefore has no liability to plaintiff for the cost of
defending DeFalco following the date of that decision. In view
of plaintiff's concession at trial that no defense costs were
incurred in the period December 1, 1995 through May 15, 1996,
Nutmeg argues that it is entitled to judgment dismissing the
complaint.

Plaintiff rejoins with a convoluted argument. It contends that
the Third Department knew when it decided the appeal in the
Coverage Case that the only claim remaining, as a result of Judge
Goettel's earlier ruling, was the RICO count but nevertheless
held that Nutmeg was obliged to provide a defense. Moreover, it
argues that Judge Parker's 1996 ruling had no effect at all
because Judge Goettel previously had dismissed all but the RICO
claim. But it is unnecessary to deal with the intricacies of
plaintiff's argument.

Nutmeg's argument rests on the Appellate Division's comment
that "RICO claims . . . are clearly excluded under the policy . .
.," which it construes as meaning that it had no obligation to
defend the RICO claim. But the comment cannot be understood in
isolation.

The appeal before the Third Department in the Coverage Case was
from an order which held that the claims in DeFalco were not
within the insuring provisions of Nutmeg's policy, in substance
because the case arose out of an alleged criminal conspiracy and
was not within the errors and omissions insuring clause. As the
appellate court recognized, however, the duty to defend under New
York law is "exceedingly broad." It arises whenever facts are
alleged which might bring any liability within the ambit of the
carrier's duty to indemnify. The court noted also that a
plaintiff's "characterization of the causes of action alleged in
a complaint [is] not controlling."*fn17 In view of the specific
policy coverage for injuries resulting from "violation of civil
rights," it held "that the underlying facts [alleged in
DeFalco] are covered by the subject policy" and that Nutmeg had
a duty to defend.*fn18

The comment on which Nutmeg places such heavy reliance was made
in the discussion of an issue quite distinct from the existence
of a duty to defend, viz. whether, given the existence of that
duty, Dirie and Curtis had a right to a defense by counsel of
their choice as opposed to counsel provided by Nutmeg. On that
point, the Third Department said:

"Considering defendant's breach of the insurance
contract by a refusal to defend at the outset,
coupled with the RICO claims which are clearly
excluded under the policy, we find that defendant's
interest in defending the Federal [DeFalco] action
is in conflict with plaintiffs' interest."*fn19

It went on to hold for Dirie and Curtis on the right to control
the choice of counsel.

In this case, the facts alleged in the various complaints filed
by the DeFalco plaintiffs could have resulted in liability on
the part of Dirie and Curtis for which Nutmeg would have been
obliged to indemnify them. Although the non-RICO claims were
dismissed several times and Nutmeg presumably would have no
obligation to indemnify for purely RICO liability, there never
has been any assurance that the case ultimately could not result
in insured liability. Among the possibilities were amendment of
the pleadings at trial to permit submission of non-RICO theories
to the jury, an appellate reversal of the dismissal of the
Section 1983 claim, and an order for a new trial. Accordingly,
nothing has occurred since the Third Department's decision that
warrants any alteration in its conclusion that Nutmeg was and
remains obliged to provide Dirie and Curtis with a defense by
counsel of their choosing.

The Reasonableness of the Amounts Claimed

Plaintiff claims that it billed, and Nutmeg is responsible for
payment of, a total of $200,255.30 in respect of bills issued
from December 1, 1995 to the date of commencement of this
action,*fn22 of which $188,676 is for counsel fees and the
balance for expenses incurred in the defense. Nutmeg resists this
conclusion on the grounds that the hourly rate charged by
plaintiff for Mr. Harrington's time is unreasonable and that the
services all were not reasonably incurred.

Hourly Rates

In the main, plaintiff seeks recovery of $300 per hour for the
services of Mr. Harrington, $140 for those of his associate, and
$60 for those of his paralegals.*fn23 As previously noted,
however, the Court has determined that plaintiff is collaterally
estopped to contest that the reasonable hourly rates for these
services in the period ending December 1, 1995 were $230, $140,
and $60 per hour, respectively. The only basis open to plaintiff
for contesting those hourly rates here would be proof that
factors affecting the reasonableness of hourly rates for lawyers
and paralegals — the background, training, standing and
experience of counsel, the number of years counsel has been
admitted to the bar, and the complexity of the litigation —
changed materially between the period with respect to which
plaintiff is estopped and the immediately ensuing period at issue
in this case.

At trial, plaintiff attacked the hourly rates previously fixed
in state court on two bases. It contended, first, that the rates
billed were reasonable. In any case, it argued, the services
during the period at issue here, unlike those at issue in the
state court, included representation of Dirie and Curtis at
trial, a service allegedly warranting a higher hourly rate. But
plaintiff's arguments fall short of the mark.

To the extent that plaintiff seeks to establish that the $300
hourly rate it seeks for Mr. Harrington's services in DeFalco
was reasonable, it seeks only to relitigate the issue already
decided against it both in the state court and by this Court in
ruling on the pretrial motions. It had its opportunity to seek to
establish the reasonableness of its hourly rates. It lost. It is
not entitled to another bite at the apple simply on the theory
that this Court might disagree with the state court JHO.

The second of plaintiff's arguments at least is responsive to
this Court's pretrial ruling in the sense that it seeks to
differentiate the issue that was before the JHO in the state
court from that now in question although the argument of course
should have been made in response to defendant's motion for
partial summary judgment on the basis of collateral estoppel,
which it was not. Even assuming, however, that the contention is
properly before the Court, it is rejected. While the evidence
established that some attorneys charge more per hour for
representation at trial than for pretrial work, the Court is not
persuaded that this is generally true. Moreover, it is important
to recognize that plaintiff and its predecessor billed its
clients for Mr. Harrington's services at the same hourly rate for
both trial and pretrial services. In consequence, the Court holds
that the fact that the services at issue in this case included
trial work while those at issue in the state court did not is
insufficient to differentiate the issue now before this Court,
for collateral estoppel purposes, from the issue already decided
in the state court. Further, even if the preclusive effect of the
state court judgment were disregarded insofar as it related to
services rendered in the trial of DeFalco, this Court would
find that the reasonable hourly value of Mr. Harrington's
services at trial was precisely the same as that for all other
services rendered by him.

It is undisputed that plaintiff and its predecessors devoted
456.6 hours of Mr. Harrington's time,*fn24 318.6 hours of the
time of its associate, and 89.7 hours of the time of its
paralegal*fn25 to and incurred $11,579.30 in expenses in the
defense of DeFalco during the relevant period. There is no
dispute as to the expenses. Applying the hourly rates found
reasonable above to the time thus expended, adjusting for the
small number of additional hours billed at lower rates, and
adding the expenses results in the finding that plaintiff is
entitled to judgment against defendant in the amount of
$168,293.30 plus prejudgment interest at the statutory rate in
New York diversity cases of 9 percent. The Court fixes August 1,
1996 as a reasonable intermediate date from which to compute
prejudgment interest.*fn26

Conclusion

For the foregoing reasons, plaintiff shall have judgment
against defendant in the amount of $168,293.30 plus prejudgment
interest at the rate of 9 percent from August 1, 1995 to the date
of the judgment. The foregoing constitute the Court's findings of
fact and conclusions of law.

SO ORDERED.

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